Emma Wall: Hello and welcome to the Morningstar Series "Ask the Expert". I'm Emma Wall and I'm joined today by Morningstar Senior Fund Analyst Peter Brunt to talk about Fundsmith.
Hi Pete.
Peter Brunt: Hi Emma.
Wall: There's recently been an upgrade on the Fundsmith Equity fund. What has caused you to give the highest accolade of Gold to this fund.
Brunt: So, well with regards to timing some could argue that we've been a little bit late to the game. But as you know we follow a sort of due diligence process that we like to take our time in understanding funds thoroughly. One of the key things actually that led to the upgrade in this instance was we did review of the parent on of the five pillars that we look at. And we came out, it was neutral before and we came out with a positive view on the parent and that was one of the leg ups that we gave in the scoring that we give.
We also looked at number of other factors as you know just one of the five. And I think given the level of experience that Terry Smith has and the consistency that he has shown over the years that he's been managing the strategy. We decided to up the scores there too and overall it came out with a Gold rating.
Wall: As you mentioned one of the piece is parent, another one of them is performance. Something that Terry has done very well over the last few years. Having said that there have been some accusations levied that his fund has done very well because the type of stocks that he invests in have been huge beneficiaries of the recent stock market rally and that real drive and demand for quality for individual investors. Could you then argue that perhaps seeing as markets are looking pretty top in the U.K. and the U.S. Should there be a market downturn that actually you could expect the performance to also come down with that?
Brunt: So it’s a really good point. Its obviously, something that we have looked into extensively. Couple of things on that. Firstly, you can look to last year when there was a very strong rotation from growth stocks into value. And Fundsmith actually held up very well in that calendar year outperforming it's peers and the benchmark.
Obviously, we don’t look at one year, we are concerned by the long term. And so did a lot of work looking at similarly managed, similarly, portfolios with a similar characteristic as Fundsmith. So, the quality growth type funds, that typically invest in wide moat companies. And against a sub-sector of around 20-25 funds Fundsmith still stands out as the best performer on an absolute return basis and on a risk adjusted basis.
Another thing that we consider is obviously the fund has some pretty significant sector biases. We were looking at the performance, is it driven by just allocation to that sector or stock selection within, and one of the impressive things about the fund is that Terry Smith has consistently managed to pick the better stocks in those sectors across the board. He has a significant amount in consumer staples, in health care but actually not only has he added value there on stock selection in those sectors he's added it elsewhere too.
Just one last thing on performance is his involvement on the Tullett Prebon pension scheme when he was CEO of Tullett Prebon which he managed from 2003 until towards the end of 2014. Whilst he wasn’t the fund manager, the day-to-day manager of that portfolio he was the advisor on that fund and he was heavily involved in the decisions. Now they only change one stock a year in that fund. So it's very understandable that he wants to call that as his track record. He's got areas where he has deferred from Andy Brown he is the named portfolio manager.
Such as when he came out of newspapers earlier and he actually managed to provide significant outperformance on that fund in a period where quality growth wasn’t really in the sweet spot of the market.
So, all of this collectively is just really grown our confidence in the fund that he is able to not only produce good returns in an environment that is favorable to his investment style. But above and beyond that investment style his stock selection is strong and he's shown that he can add value in environments that are not so favourable.
Wall: Pete, thank you very much.
Brunt: You are welcome.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
